INVESTORS are ploughing $26.5 billion a year into self-managed superannuation funds, as the rapidly expanding sector puts growing competitive pressure on the rest of the retirement savings industry.
With many super funds struggling to regain investor confidence after the global financial crisis, a new snapshot of the self-managed sector underlines its rapid growth, which is largely being driven by voluntary contributions.
Figures to be published on Wednesday by the Tax Office show that since 2008, the self-managed sector has ballooned by almost a third, with almost $440 billion in assets under management this June.
Member contributions are driving most of the sector's growth, with investors tipping in $17.5 billion a year, more than double the amount contributed by employers.
A key reason for the rapid growth of self-managed super has been its relatively low cost, and the data confirmed the sector's average ratio of expenses to assets had declined steadily between 2008 and 2011, from 0.69 per cent to 0.54 per cent.
Analysts say this lowering in costs has dragged down average fees across the super industry however, they caution that fixed accounting fees mean that self-managed funds are only cheaper for people with a balance of at least $300,000.
Another attraction of self-managed super is that it gives investors control over where their retirement savings are invested, and this was also reflected in the figures.
Term deposits, cash and Australian shares - easily accessible to small investors - accounted for about 60 per cent of the sector's assets.
The head of research at Rainmaker, Alex Dunnin, said poor returns in many asset classes had made term deposits look attractive in recent years. However, falling interest rates would provide a growing challenge to the sector.
"Up until recently if you stuck money in term deposits you would have been one of the best fund managers in the country," Mr Dunnin said.
The average balance for self-managed funds at June 30, 2011, was $506,000 - about 17 times greater than the average balance of a regulated fund.
The Minister for Superannuation, Bill Shorten, said self-managed super was a key part of the nation's retirement saving system, which the government had sought to strengthen by raising the superannuation guarantee.
"The SMSF sector is the largest sector of the Australian superannuation industry with about 480,000 funds, holding almost $440 billion in assets," Mr Shorten said.
The bulk of self-managed super fund members are aged 45 or older, but the report also showed increasing growth among people aged between 25 and 44.
The chief executive of the SMSF Professionals' Association of Australia, Andrea Slattery, said there was growing interest in the sector from young people who were self-employed, ran a small business or were senior executives.
"It's not just the older ones. It's a more diverse group that's becoming interested," she said.
Frequently Asked Questions about this Article…
How much money are investors putting into self-managed superannuation funds (SMSFs) each year?
Investors are ploughing about $26.5 billion a year into SMSFs. Member (voluntary) contributions make up a big part of that flow — roughly $17.5 billion a year — which is more than double the amount coming from employer contributions.
How big is the SMSF sector in Australia right now?
As of the snapshot referenced in the article, the SMSF sector holds almost $440 billion in assets with about 480,000 funds. The average SMSF balance at June 30, 2011, was around $506,000.
What’s driving the rapid growth of self-managed super funds?
The growth is being driven mainly by voluntary member contributions and investors wanting greater control over where their retirement savings are invested. Cheaper operating costs compared with some other funds (at least for larger balances) have also helped expand the sector since 2008.
Are SMSFs cheaper than retail or industry super funds?
SMSF expenses have fallen — the average expense-to-assets ratio dropped from 0.69% in 2008 to 0.54% in 2011 — and this has helped reduce average fees across the industry. However, because SMSFs have fixed accounting and administration fees, they tend to be cost-effective mainly for members with balances of about $300,000 or more.
What types of investments do SMSFs typically hold?
Around 60% of SMSF assets are in easily accessible investments for small investors: term deposits, cash and Australian shares. These asset choices reflect the control many SMSF members want over their retirement savings.
Who is increasingly joining or showing interest in SMSFs?
While the bulk of SMSF members are aged 45 or older, the sector is seeing growing interest from people aged 25 to 44 — especially the self-employed, small business owners and senior executives, according to the SMSF Professionals' Association.
What challenges could affect SMSF returns going forward?
A big challenge is falling interest rates. Term deposits and cash were attractive when other asset classes produced poor returns, but as rates decline their appeal — and the returns SMSFs have relied on — may weaken. Fixed administration fees also reduce cost advantages for smaller balances.
How does the average SMSF balance compare with balances in regulated super funds?
The average SMSF balance was about $506,000 at June 30, 2011 — roughly 17 times the average balance of a regulated fund, which highlights that SMSF members typically hold substantially larger balances than members of standard regulated funds.
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